The Importance of Separating Personal and Business Finances

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Written by Guest | Last Updated February 24th, 2020
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Guest Post by Emily Morgan 

Once you launch a business, you often use your personal assets as investment or your credit score to get the necessary funding. However, when your business starts bringing you profit, it’s imperative to craft a boundary between your business and personal finances.

This way you will not only be on the right side in the corporate world but also will know exactly how your company operates and how much profit it really makes.

Here are some of the benefits of keeping your personal and business finances separate: 

  • Lower the taxes
  • Increase stability
  • Strengthen your professional Image
  • Pay yourself a salary
  • Build business credit

Why do you need two separate accounts?

When you start a business, it’s essential to understand that it’s a separate company and its finances should be independent of your personal funds.

You may use your own money to start, and it’s quite normal. The results of the SBA Office of Advocacy from U.S. Census Bureau survey have shown that the two top sources of startup capital were personal savings (57%) and personal credit card (8%). As your startup starts to grow and develop, you need to see how well it’s doing and whether it’s a profitable business. Thus, being a business owner, you need to separate your business from personal finances and make it an independent entity.

Another good reason for keeping these parts separate is that your company will pay separate taxes. It will be easier for your accountant to do the work, and you will see the real performance of your company.

1. Lower the taxes

According to the U.S. Census Bureau, there were almost 6 million firms and small companies in 2016. This number is constantly growing as new startups are being launched daily. Now there are over 30 million small businesses in the United States.

The raise is impressive, right? Who doesn’t want to turn his startup into a successful venture? One of the most useful benefits of separating your business and personal accounts is that you may reduce the amount of taxes.

This way you will have a clear record of the finances strictly connected with the business. Once you decide to file for the taxes, you will make it separately for your company. If you have a business account, then it’s possible to deduct some of the expenses from the whole amount. Deductible expenses connected with business are phone costs, advertising expenses, rent, etc. It’s important to keep all invoices and receipts so that you can easily track the expenses and take control of them.

2. Increase stability

In reality, it’s quite challenging to make your startup grow and develop, even survive the first year. According to the small business credit statistics, only 80 percent of small businesses created in 2014 survived until 2015. In 2019, the statistics are not better. A lot of businesses failed during their first year.

In other words, even if you have a brilliant business idea, nobody can tell you it will become a successful enterprise. If you are determined to start this gamble, you need to understand that there may be hard times and financial loss. If you set a certain part of your income aside, it will help you stay financially afloat and survive through difficulties.

3. Strengthen your professional image

Another significant thought here is your professional image or how your enterprise is viewed by other colleagues, investors, or even consumers. Remember that you’ve started a new company, not a hobby, so you need to separate everything including your finances. Having a business account will present you as a serious entrepreneur who cares about establishing his or her company identity.

4. Pay yourself a salary

If you are wondering how to separate your business from your personal finances, here is a tip. You should start paying yourself a regular monthly salary just as you would have if you were an employee. This easy trick will help you distinguish your business funds and create a line between them and your personal funds.

5. Build your business credit

The last but not least essential benefit is to build your business credit.

You may have used your personal savings at the beginning, but now it’s time to create a separate account for business. Once your venture starts to grow, you may need to take out a business loan to cover expenses.

Business credit is mandatory if you apply for a loan. Otherwise, your personal credit score may be used to assess whether you will be approved for a loan. Those who have bad personal credit score won’t be able to receive extra funds from the lending institutions.

These are the main reasons for every entrepreneur to separate their personal and business finances. Turn your startup into an established entity, and your brave business idea will bring you success.

Emily Morgan is a professional writer who is passionate about finance since 2013. Today, Emily is a member of the Fit My Money team aimed to help people improve their financial literacy.

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